With freight rates remaining static and inflation continuing a downward trend, the bond market remained bullish in the first week of the fortnight ended 4 March 2005. Reports that the small savings rate might be inflation-indexed also cheered the debt market as this would translate into lower rates on small savings schemes, thereby enabling banks to reduce their deposit rates.

The bond market experienced some edgy moments over the on-tap sale of 7.17% State Development Loan, 2017, by 16 state governments; surge in crude prices; US Federal Reserve Chairman Alan Greenspan’s indication of more hikes in Fed fund rate and the higher fiscal deficit target of 4.3% of GDP set by Finance Minister P Chidambaram in the Union Budget 2005-06.

21 February: Market sentiments remained cautious ahead of the sale of 7.17% State Development Loan, worth Rs 6300 crore, with a maturity of 12 years, by 16 state governments. The benchmark 10-year yield was quoted at 6.50%, down marginally by one basis point from its previous (19 February) close of 6.51%.

22 February: Bonds weakened in early trades amid concern over escalation in international crude prices that breached US$ 50 per barrel. The benchmark 10-year yield was up by one basis point to 6.51% but eased down to close at 6.5053%.

23 February: The benchmark 10-year yield was up by one basis point to 6.51% in morning trades but closed at 6.5039%, hardly changed from its previous close of 6.5053%. The resulting ample liquidity following the Reserve Bank of India (RBI) intervention in the forex market provided cushion to the bonds.

Meanwhile, the central bank closed the on-tap sale of the state development loans for 10 states. The sale had opened on 22 February 2005 on behalf of 16 states. Applications for an aggregate amount of Rs 3760 crore were received, of which subscriptions for an aggregate Rs 3031 crore were retained. The amount collected fell short of the targeted amount of Rs 6300 crore. At its weekly auction of 91-day Treasury bills, RBI raised the cut-off price to Rs. 98.71 from Rs 98.70. The corresponding yield declined to 5.24%, from previous week’s 5.28%.

24 February: Bonds gained amid easing crude prices and completion of the on-tap sale of state development loans. The benchmark 10-year yield was marginally down to 6.49% compared to its previous close of 6.50%. Sentiments remained wary ahead of inflation data to be released the next day along with the Economic Survey 2004-05.

25 February: Sentiments in the bond market improved with inflation remaining static at 5.01% in the week ended 12 February 2005. The benchmark 10-year yield was marginally down to 6.4987%, from the morning’s high of 6.50%. It was slightly higher compared to its previous close of 6.4910%.

26 February: The benchmark 10-year yield plunged to 6.46%, three basis points down from its previous close of 6.4987% on lower inflation and anticipation of stable interest rates.

RBI announced the auction of 91-day and 364-day Treasury bills to be scheduled on 2 March. The auction of 91-day T bills was for a notified amount of Rs. 2000 crore. Of this, Rs 500 crore was to be auctioned under the regular auction calendar and Rs 1500 crore under the Market Stablisation Scheme (MSS). The auction of 364-day T bills was for a notified amount of Rs 2000 crore. Of this, Rs. 1000 crore was to be auctioned under the regular auction calendar and Rs. 1000 crore under MSS.

28 February: A higher fiscal deficit target of 4.3% for FY 2006 announced by the finance minister in the budget dampened sentiments. The benchmark 10-year yield edged up to close at 6.54%, from the morning’s low of 6.44% before the announcement and eight basis points up from its previous close of 6.46%.

1 March: Sentiments in the bond market turned jittery amid concerns over higher-than-expected government borrowing plan of Rs. 110291 crore in FY 2006. The benchmark 10-year yield inched up to 6.64%, 10 basis points higher than its previous close of 6.54%.

2 March: Bonds edged up as Economic Affairs Secretary Rakesh Mohan allayed fears of high government borrowing exerting pressure on the interest rate. He stated that there was sufficient liquidity and that the total borrowing may be less than budgeted. The benchmark 10-year yield eased by one basis point to 6.63%.

3 March: The surge in crude prices dampened debt market sentiments with the benchmark 10-year yield edging up by three basis points to 6.65% before easing amid expectation of low inflation, down by two basis points from its previous to close at 6.61% close of 6.63%.

4 March: Bonds gained amid lower inflation rate of 4.83% in the week ended 19 February 2005. The benchmark 10-year yield ended the fortnight at 6.60%.

Meanhile, RBI re-introduced 182-day Treasury bills to raise Rs 1300 crore. The government had last raised funds through 182-day T bills in mid-2001.

Call money rates remained firm at 4.60-4.80% throughout the fortnight, closing on a lower note of 4-4.25% (on 4 March) due to ample liquidity existing in the banking system.

Outlook: The outlook for the debt market remains cautious due to the higher fiscal deficit target and increased social spending outlay. The market will be keenly watching the movement in international crude prices.